Fitch affirms PH rating; outlook remains stable

DEBT watcher Fitch Ratings has affirmed the Philippines’ investment grade rating and stable outlook.

“The ‘BBB’ rating and stable outlook reflect the Philippines’ strong medium-term growth prospects, which support a gradual reduction in government debt/GDP (gross domestic product) over the medium term, after substantial increases in recent years,” Fitch said in a commentary released last Friday.

The ‘BBB’ is a notch above minimum investment grade while the “stable” outlook means the rating is likely to remain unchanged within next 12 to 18 months.

The Philippines has been rated “BBB” by Fitch since December 2017. The outlook was revised to negative in July 2021 but was reverted to stable in May 2023.

Weak scores in World Bank governance indications and low per capita GDP, however, are constraints to the rating, Fitch said.

“The economy’s size supports the ratings, but is not a strength compared with some similarly rated regional peers,” it pointed out.

The ratings agency’s report was issued following the release of stronger-than-expected third-quarter growth.

Fitch subsequently forecast real GDP growth of above 6.0 percent — more than double the “BBB” median — over the medium term, supported by “large investments in infrastructure and reforms to foster trade and investment.”

After rising to 5.4 percent of GDP last year, the general government (GG) deficit is expected to narrow to 3.8 percent by 2025. The central government (CG) deficit is also expected to drop to 4.9 percent from 7.3 percent in 2022.

Narrower GG deficits compared with CG deficits reflect surpluses at LGUs (local government units) as well as social security funds, Fitch noted.

“Sustained improvements in LGUs’ chronically weak spending execution could support economic growth, but could limit scope for narrowing the GG deficit relative to the CG deficit,” it added.

While the government is targeting a CG deficit of 4.1 percent by 2025, Fitch said it was unlikely to fully realize projected spending efficiency gains, capital spending reductions and “modest” tax measures.

“We see limited potential for the government to outperform its revenue forecasts in the absence of bolder tax reforms, and the government would likely use any excess revenue to accelerate spending, as in recent years,” it noted.

The GG debt-to-GDP ratio was forecast to hit 54 percent of the economy by 2023 and that for CG debt to 61 percent.

“This is broadly in line with our projections for the ‘BBB’ median, although the Philippines used to have lower debt levels than the median,” Fitch said.

“Strong nominal GDP growth and narrowing fiscal deficits contribute to a steady downward path for government debt/GDP over the medium term,” it added.

The current account (CA) deficit, meanwhile, is expected to narrow to 2.0 percent of GDP by 2025 from 4.5 percent in 2022 due to lower oil imports.

“Structural CA deficits will likely persist in the medium term, even as the commodity shock subsides, on strong domestic demand and the infrastructure build-out,” Fitch said.

Long-term foreign borrowings and foreign direct investments are expected to “comfortably” finance the CA deficit and Fitch expects net external debt to turn positive in 2025.

“International reserves have declined this year after earlier reversing their 2022 fall, but reserve coverage should remain ample at over six months of current external payments (still above ‘BBB’ peers),” it added.

Inflation, meanwhile, was forecast to moderate to 3.5 percent by 2025 but the debt watcher warned that continued pressures remained risks.

“We continue to view the central bank’s inflation-targeting framework and flexible exchange rate regime as credible,” Fitch said, also noting that “the government’s response to the commodity price shock has been measured.”

The government, it also said, was continuing with structural economic reforms that could help spur private investments.

Factors that could lead to negative ratings actions, meanwhile, were said to be reduced confidence in strong, stable medium-term economic growth and continued adherence to sound economic policies, failure to gradually reduce the government debt/GDP ratio and a significant deterioration in foreign-currency reserves and the net external debt position.

Positive ratings actions, on the other hand, could follow even stronger medium-term growth than forecast and continued adherence to sound macroeconomic policies, sustained reductions in debt ratios to levels significantly below the ‘BBB’ median and the strengthening of governance standards.